Law Of One Price

The theory that the price of a given security, commodity or asset will have the same price when exchange rates are taken into consideration. The law of one price is another way of stating the concept of purchasing power parity.

The law of one price exists due to arbitrage opportunities. If the price of a security, commodity or asset is different in two different markets, then an arbitrageur will purchase the asset in the cheaper market and sell it where prices are higher.

When the purchasing power parity doesn't hold, arbitrage profits will persist until the price converges across markets.


Investment dictionary. . 2012.

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